Learning from Mistakes: What do Inconsistent Choices Over Risk Tell Us?
Posted: 11 Sep 2008
Date Written: September 8, 2008
We implement a risk experiment that allows for judgment errors to investigate who makes mistakes and whether it matters. The experiments are conducted with a random sample of the adult population in Rwanda, and survey data is collected on the usage of financial instruments that serve as consumption-smoothing devices. We find a high degree of inconsistent choices, with over 50% of the participants making at least one mistake. Importantly, errors are informative. They are not random, and they correlate with financial decisions. While risk aversion alone does not explain financial decisions, we find that risk aversion and inconsistent choices interact in significant and sensible ways. As we would expect, risk-averse individuals are more likely to belong to a savings group and less likely to take out an informal loan. For those more likely to make mistakes, however, as they become more risk averse, they are less likely to belong to a savings group and more likely to take up informal credit, suggesting that mistakes can lead to less than optimal behavior. Our results show that we can learn something from mistakes.
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